a 21st Century offering

So last week, Market-Leninism reached its moment of synthesis:

 After the excitement of Friday’s initial public offering, shares in Alibaba, China’s biggest e-commerce company, slipped back a bit on Monday. At the closing bell on Wall Street, the stock was trading just below ninety dollars, down more than four per cent from its closing price on Friday. But that still left Alibaba’s market capitalization above two hundred and twenty billion dollars, which means the market reckons that the company is more valuable than Facebook or Amazon.

 The business case for investment is that Alibaba and its various subsidiaries are the means by which millions of people in China buy and sell things to and from each other. The business case against involves things like opaque ownership structures, but these sound like quibbles compared to palpable levels of essentially political unease.

 The Chinese internet is arguably not only the most rigorously policed online environment in the world, but the most rigorously policed space full stop. An important element of the critique of Chinese internet management is that it crushes innovation, the free flow of ideas and hence the ability of local companies to develop and compete on the world stage and so on. Round these parts we've always considered this to be nonsense, but there it is, and moreover the internet-freedom-business-prosperity ideological quadrilateral is an essential component of the United States' general offer to the world.

Anyway, China's apparently stifling environment has now produced what investors in the NYSE have determined is the world's most valuable company. And in Jack Ma, it's also produced an entrepreneur in the classic mould, whose every babble and belch on mission and personal development and leadership and customer value and the rest of it is treated with Pavlovian flattery.

So China's comprehensive unfreedom has not only produced the most valuable company in the world's most happening sector, it has produced a 'business leader' of the sort usually considered an American archetype, and, more generally, as a characteristic product of freedom.

 Mr Ma does, naturally, have those famous Chinese characteristics. His personal philosophy might be as repellent as any business prophet, but gems like this:

 You are poor because you do not have the desire to become successful

You are poor because you lack foresight

You are poor because you cannot overcome your cowardice

You are poor because you lack the courage and determination.

aside from being a fairly standard part of the 'succeed and grow rich' school of homiletics, are also reminiscent of the kind of slogans that cadres used to paint on village walls during the early reform period. He is also on record as stating that the Tiananmen massacre was just the sort of decision that you'd expect a wise, tough-minded chief executive to take. I suspect this is a position fairly widely held in the wider Chinese business community; as we hear more from them, so we will hear more of it.

 Anyway, to recap: The repressive architecture of China has now developed the world's most valuable company. It consists of a vast pyramid of atomised small groups and individuals entirely bent on accumulation, without the distraction of competing ideas. A process of complete depoliticisation gets a ringing endorsement from investors via the New York Stock exchange. There's no clearer statement of where China wants to be in the world, and no more depressing evidence of its success.

 And just think of the appeal across both the political and business wings of the wider overclass. No distraction from competing political and economic ideas. No need to fund and generate thought that justifies existing hierarchies, or make electronic money transfers to ostensibly competing political parties. Just authority presiding serene and unchallenged over a striving pyramid of self-reliance. I may be exaggerating a bit, but I think China, through the agency of a billionaire Mark E Smith lookalike, may have just put its offer for the shape of the 21^st century on the table.

Comments

[Phil]

It's late Victorianism without the class struggle - after all, that didn't work out, so they've decided to skip straight to the postmodern. All a bit too David Mitchell for comfort.

[ajay]

An important element of the critique of Chinese internet management is that it crushes innovation, the free flow of ideas and hence the ability of local companies to develop and compete on the world stage and so on. Round these parts we've always considered this to be nonsense

Not sure why. Alibaba is not, in fact, competing on the world stage. It had a hell of a time fighting off eBay in its home market (eventually resorting to, essentially, product dumping, of the kind we all abhor when it's Amazon doing it), and Jack Ma famously said: "eBay may be a shark in the ocean, but I am a crocodile in the Yangtze River. If we fight in the ocean, we lose—but if we fight in the river, we win." Let me know when Alibaba takes a major non-China market off eBay and maybe then we can say it's competing on the world stage.

Anyway, China's apparently stifling environment has now produced what investors in the NYSE have determined is the world's most valuable company.

No. It's produced what investors have determined is the world's most valuable IPO. $220 billion isn't nothing, but it's well below the market cap of Apple, Exxon, Microsoft, Google, Berkshire Hathaway, Johnson & Johnson, Wells Fargo, GE, Royal Dutch Shell, Hoffman-La Roche, Wal-Mart, Chevron and no doubt various others. And the estimated value of various state-owned companies like Saudi Aramco.

And today? Today BABA.N is down another 3%...

[dsquared]

Let me know when Alibaba takes a major non-China market off eBay

You have to add Taobao to Alibaba to get it like for like, in which case it comes down to whether you consider Malaysia to be a major market (I think obviously yes). And it's kind of attacking the deck to say "non-China" - eBay was number 1 in China for a long time, and coming up with a credible local rival to eBay is more than anyone else seems to have done.

Your point on market cap is dead on though; Alibaba is not the biggest company by a long chalk and would be valued much lower if it tried to float anything like the whole company (people have been going on about the misleading nature of market capitalisation of companies with a restricted float since the dot com era). On the other hand (the third of my rapidly sprouting hands), the fact that Apple is top of the tree means that any attempt to use it as an example of western success over the Chinese model kind of comes with a big asterisk.

[Chris Williams]

Why, Dan? <- That's a bit of an 'R101 inquiry' question, in that I'm not suffering from any shortage of reasons why I think that you might have written that about Apple, but I can't work out exactly which of them you were getting at.

[ajay]

I had forgotten about Malaysia - good point. But I don't think it's stacking the deck to say that competing on the world stage means, for a Chinese company, competing outside China. Otherwise you've got Barr's Irn-Bru 'competing on the world stage' on the basis that it has kept Coke in second place in Scotland.

[ajay]

the fact that Apple is top of the tree means that any attempt to use it as an example of western success over the Chinese model kind of comes with a big asterisk.

Apple is a monolithic, highly secretive organisation which pays lip service to to the utopian ideals of its founders but is really entirely focussed on profit; its business model depends on its ability to get millions of Chinese peasants to work in fairly atrocious conditions; and it's dominated by obsessive loyalty to a distinctively-dressed dead ideologue. It is clearly not so much a US company as a bit of the Chinese Communist Party that has somehow come adrift and ended up in Cupertino.

[Keir]

TradeMe has kept eBay out in the NZ market, although TradeMe predates eBay I think.

(And L&P outsold coke for some periods of recent NZ history, to bring the circle back to the Barrs full round.)

[Alex]

Ajay: a monolithic, secretive organisation dominated by engineers, that makes its money manufacturing the world's consumer electronics, defined by an ideology of aesthetic harmony and stability, which it diffuses internally through a somewhat facile but well-meant system of high-cultural survey courses?

That regularly revises its official line, often quite dramatically, without ever seeming to doubt its fundamental truth?

That believes in accepting the chaotic diversity of its society so long as it is only expressed through a carefully vetted official distribution network?

[ajay]

TradeMe has kept eBay out in the NZ market, although TradeMe predates eBay I think.

Alibaba also predates eBay; Alibaba was founded in 1999 and eBay, I think, didn't get into China until 2002 with the purchase of Eachnet.

Alex: nice one.

[dsquared]

I merely meant that, famously, Apple's products have so much China (and, to be fair, Europe) in their value added that each one sold increases the US trade deficit.

[ajay]

famously, Apple's products have so much China (and, to be fair, Europe) in their value added that each one sold increases the US trade deficit.

I don't know about other Apple products, but iPhones have virtually no China in their value added. The Chinese input is about $8 in low-skill final assembly per phone. An iPhone consists of a couple of hundred dollars worth of Korean, Taiwanese, US, Japanese and German components, stuck together by a Chinese person for $8 and then sold for $500 or so.

And presumably this only really applies to iPhones sold in the US. If Apple sells an iPhone in, say, South Africa, then that has effectively decreased the US trade deficit with China, because US firms will have exported a few bits and bobs to China to make the iPhone with, and there's no counterbalancing import of a finished iPhone to the US. And a lot of (most?) iPhones sold are sold outside the US.

[Dan]

Apple's products have so much China (and, to be fair, Europe) in their value added that each one sold increases the US trade deficit.

Assuming you mean "sold in the US" -- isn't that trivially true of any product with an imported component?

[broader point taken, even if ajay's explanation is more entertaining]

[ajay]

Assuming you mean "sold in the US" -- isn't that trivially true of any product with an imported component?

Yes.

It's a bit weirder because the iPhone isn't a US-built thing with a tiny Chinese component inside - the tiny Chinese component is the final assembly, which means that for the purposes of counting trade balances, the entire iPhone counts as $500 of Chinese exports, even if most of the value-add takes place elsewhere.

The more important point is that all Apple's profit off selling an iPhone anywhere in the world gets added on to the US GDP. So for every iPhone sold, China's GDP goes up by $8 and US GDP goes up by, at a guess, $200. (And Taiwan's, Korea's, Germany's etc also go up a bit).

And returning to dsquared's original point, I honestly cannot see why this means one can't use Apple as an example of Western success over the Chinese model, simply because it outsources $8 of final assembly grunt work to China (or rather to Foxconn, a Taiwanese company that operates in China). I wouldn't impugn, say, the Americanness of Coca-Cola because it imported aluminium for its cans from Russia.

[ajay]

Or, more to the point, Wal-Mart, which is probably responsible for about 60% of the US trade deficit with China all by itself.

[dsquared]

I think you've taken the $8 figure from the Forbes article, but the trade statistics don't work that way - they count the whole ~$200 value of a manufactured iPhone fob Shanghai as an export of goods to the USA. The German, etc components show up as an import of components to China and don't touch the USA trade deficit at all.

And this is the point I was trying to make (although "value added" was totally the wrong concept - I can only blame late nights and Greek brandy); Apple is a very very big user of Chinese manufacturing, and this isn't a minor or incidental part of its corporate strategy. Apple is a big beneficiary of the modern Chinese way of doing things. Although Foxconn is actually Taiwanese owned.

[dsquared]

The more important point is that all Apple's profit off selling an iPhone anywhere in the world gets added on to the US GDP

This can't literally be right - GDP isn't a profit concept, it's an activity concept. Apple's profits from non-US sales would go into GNP in principle, but even then I would not be 100% sure they do as another thing that's true about Apple is they're very keen on making sure profits are earned by things that don't pay US tax and the national income accounting won't follow GAAP.

Also to note that assembly is only a "trivial $8" precisely because it's outsourced to China! It could be as much as ten times that if it was done in silicon valley

[Alex]

It was true of the first and second generation iPhones that they were basically put together from proprietary components, but since the 3G and especially the 3GS, there's been more and more Apple and US value-added in them.

The first big change was when Apple started using their own A4 chip design after acquiring PA Semiconductor. Since then, they've become a lot more vertically integrated - they own the machine tools at their suppliers' plants, and sometimes design and at least prototype them - and a lot more American.

The Samsung plant that fabs most of the (Apple-designed, on an ARM Holdings theme) chips is in Austin, Texas (although the latest ones are TSMC, which could be in Taiwan or could even be Oregon); the famous artificial sapphire is manufactured in Arizona by GT Advanced Technologies. Apple pre-paid that one's whole output for several years, thus financing the tooling and I think even the building.

Presumably the sapphire wafers are booked as an export from the US and then the displays machined from them (not very well - currently throwing 40-50% of them away as QC fails) as an import embedded in finished products, while the chips from Austin are clearly a US export, although somewhere Samsung will repatriate profits and ARM will get its royalty.

Meanwhile, Cirrus Logic for the sound, Imagination Technologies of Kings Langley for the GPU, Qualcomm for the baseband radio...although there's a rumour that Apple is putting together a baseband R&D group and would make them at Samsung. It's like I, Pencil but more shiny.

[dsquared]

Since then, they've become a lot more vertically integrated - they own the machine tools at their suppliers' plants, and sometimes design and at least prototype them - and a lot more American.

This wouldn't make them any more American from the point of view of national accounts, it's an activity basis rather than ownership.

[ajay]

But it does make them a lot more American from the point of view of being part of "the American way of doing things", though. Which is the point we're discussing, isn't it?

I just don't think it holds up to argue that, because Apple does final assembly in China, it should be counted as an example of the excellence of the Chinese model rather than the Western model of business. Far more of the cost of an iPhone is Korean and Japanese and German bits and bobs. Does that make Apple more of a German than a Chinese company, regardless of the oddities of calculating trade deficits?

This can't literally be right - GDP isn't a profit concept, it's an activity concept.

Hang on, I may have got this wrong...

Apple's business model, very simplified, is:
We are a US company. We buy components from Korea (and pay the Korean supplier $100 which shows up in Korean GDP)

We ship them to China and get them assembled there (pay the Chinese person $8 which shows up in Chinese GDP)

We ship the phone from China to America and sell it for $300 (which shows up... where? In US GDP, no?)

Or: we ship the phone from China to Germany and sell it to a German (he's buying the phone from a US company... so doesn't his $300 show up in US GDP too?)

(NB the German could be a reseller or a phone company, not necessarily a user, just to head off that objection)

[dsquared]

Or: we ship the phone from China to Germany and sell it to a German (he's buying the phone from a US company... so doesn't his $300 show up in US GDP too?)

As far as I can see no, if you want the system of national accounts to balance. It's an export from China to Germany (credit gross exports China, debit gross imports Germany), then (ignoring any value added by retailers or anything), is consumption in Germany. So China GDP goes up by one iPhone, Germany GDP is unchanged (+C and -M). Which reflects the activity, one iPhone assembled in China.

There is now a spare $192 sitting in a bank account in China. When that is paid back into Cupertino, it goes into the capital account, and into GNP (it's a factor payment from abroad). But a) GNP not GDP, and b) the timing difference, given the way Apple organises itself, is potentially considerable.

[dsquared]

And on the general point, Google and Facebook are two great examples of the US system being better than the Chinese one, because they don't depend at all on China to produce their goods and services. Amazon and Walmart are not quite as good as Google and Facebook, because although they don't really produce much themselves in China, one could argue (probably incorrectly in my opinion but you could argue it) that a lot of the reason why they have the market cap they do has to do with their ability to take advantage of imported Chinese manufactured goods. But then you have Apple. Which very specifically relies on a Chinese manufacturer to produce its signature products; even when it decided to diversify away from Foxconn it stayed with China. It's a much better example of the totally symbiotic relationship between big western business and China than any differences between them.

[ajay]

Hmm. But why would there be a spare $192 in a Chinese bank account at all? Apple, which is a US company, bought the components and paid the Chinese person to assemble them. When the German chap pays for the phone, he pays the money to Apple. Doesn't he?

[ajay]

Google and Facebook are two great examples of the US system being better than the Chinese one, because they don't depend at all on China to produce their goods and services.

I would be very careful indeed of stating confidently that any large internet company doesn't depend on China at all. China builds a lot of internet hardware these days. Much of Facebook's OCP hardware comes from Taiwanese hardware companies like Wiwynn and Quanta, which do their assembly in...

[dsquared]

When the German chap pays for the phone, he pays the money to Apple. Doesn't he?

This is the thing that Apple tries to avoid happening because of the potential tax consequences, but even if he does (ie if the timing difference I mentioned is zero) it's a capital account transaction and is going to go into GNP rather than GDP. Statisticians are going to try their best to not make the purchase of a Chinese-assembled item by a German consumer show up in US GDP because nothing's happened in the USA. One way to think of it is the identity Y=C+I+G+X-M -this transaction isn't consumption in the USA, nor is it investment in the USA, it's definitely not government spending in the USA, so the only way it can effect the GDP of the USA is by net exports, which is what we were talking about. If Apple takes some of its cut via a royalty on the intellectual property, that is an export of services, but just the profit in terms of the markup isn't a GDP concept item.

It's not dissimilar to my favourite pub quiz fact about Swiss banking, which is a surprisingly small proportion of GDP. The big Swiss banks make a load of profit (in good years at least, not so much recently) but in GDP terms nearly all of it shows up in the UK and USA

[ajay]

If Apple takes some of its cut via a royalty on the intellectual property, that is an export of services, but just the profit in terms of the markup isn't a GDP concept item.

OK, I think I follow, except for this bit. Apple's business model is "buy $X worth of bits, pay a Chinese person $Y to assemble them, sell the result to a German for $Z". There is a wedge here, $W=Z-X-Y, which Apple keeps. How do you break that out into "royalty on intellectual property" - which would be a service export - and "markup on reselling" which wouldn't be? You seem to be treating Apple as a company which licenses out IP to a Chinese manufacturer, which isn't quite the case.

[dsquared]

How do you break that out into "royalty on intellectual property" - which would be a service export - and "markup on reselling" which wouldn't be?

Because the two categories get very different tax treatments, the company is usually going to have to flag them up for you.

[dsquared]

And from the point of view of GDP statistics, it is much closer to being the case. Apple does design, branding and research in America, so those are the activities that should show up in US GDP, at whatever their market value is (a subject on which it would be hard to gainsay Apple). All the buying and selling components happens outside the USA, so it needs to go into GDP where it happens.

[dsquared]

This is always brain bending; I have to re-convince myself every couple of years that the SNA approach is the right one. But try this thought experiment - pretend that Apple woke up one day and found that it owned Samsung. Pretend that they didn't change anything in the operations of Samsung, but just took financial ownership. Obviously Apple's profits would be bigger, but you wouldn't want anything in the GDP statistics to change.

[Dan Hardie]

Really? Malaysia?Population of 29.7 million, GDP last year of $312 bn, pretty much a by-word for an economy stuck in the 'middle income trap' (certainly used as such in at least one FT article last week)...? If Alibaba was big in Singapore (much smaller population but approximately three and a half times Malaysia's GDP per capita) then maybe, but it isn't.

Malaysia surely isn't a major market. Apparently the current Malaysian government is rather painfully aware of the fact- hence the attempt to partially dismantle the system which favours ethnic Malays ('bumiputra') over Chinese, which in turn is provoking a fair amount of grumbling and could conceivably get very unpopular indeed.

[Dan Hardie]

Sorry, that comment should have been preceded by this, from dsquared: 'in which case it comes down to whether you consider Malaysia to be a major market (I think obviously yes).'

[dsquared]

I think the criterion we're using for this purpose is "an e-commerce market big enough that one would have expected eBay to make a serious effort at it". By that token I think Malaysia definitely qualifies. I wouldn't disagree with you on the more general economic assessment.

[Dan Hardie]

I'd like to know what's behind Alibaba's success in Malaysia. My guess is that the main factor would be that the small and medium businesses in Malaysia are overwhelmingly started and run by the Chinese community. (To the extent that Malaysian politics since Independence have largely been about UNMO passing racist laws restricting the role that the Chinese can play outside the small and medium business sector.) It's not too surprising that the Malaysian Chinese are turning to the e-commerce site favoured by their friends and relatives in the People's Republic.

It's as if we heard that Irn-Bru was the most popular fizzy drink in, say, northern Portugal, with Coke second. That would be surprising, but it would make rather more sense if we knew that the area had been settled by a large number of Scots. It wouldn't mean that Irn-Bru was about to challenge Coke across Europe.

[Malcs]

_Google and Facebook are two great examples of the US system being better than the Chinese one, because they don't depend at all on China to produce their goods and services_.

The Google Nexus phones and tablets are manufactured by Asus, a Taiwanese company with manufacturing facilities in Taiwan, Mexico, the Czech Republic and mainland China - Suzhou and Chongqing, apparently. ISTR Foxconn have a factory in Chongqing too.

[ajay]

The thought experiment helps, thanks.
Malcs: indeed.
Dan: plausible... in that case you'd expect Alibaba to be doing well in Vietnam and Indonesia as well. Is it?

[johnb78]

It is worth bearing in mind, since we're taking a formal reporting approach, that for the purposes of sales outside the US, Apple transactions involve royalties and IP that are owned by an Irish company, not by an American company.

And it is pushing it to suggest that the tiny minority of Android devices (Nexuses) that are produced to Google spec as a showcase are an important part of Google's goods & services.

[dsquared]

Googling around, and with a massive caveat that it all seems to be based on Alexa rankings rather than turnover, I think the ethnic Chinese theory is undermined by the fact that the number one ecommerce site in Malaysia is Amazon. Taobao hasn't actually done all that well, it's just that eBay has done worse. Which I suppose speaks to the question of whether it's a "major market".